Welcome to DXP Enterprises, Inc. 2021 First Quarter Earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. Kent Yee, Chief Financial Officer.

Thank you, Christian. This is Kent Yee. And welcome to DXP's Q1 2021 conference call to discuss our results for the first quarter ending March 31st, 2021. Joining me today is our Chairman and CEO, David Little. Before we get started, I want to remind you that today's call is being webcast and recorded and includes forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. A detailed discussion of the many factors that we believe, may have a material effect on our business on an ongoing basis are contained in our SEC filings. However, DXP assumes no obligation to update that information, as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings press release. The press release and an accompanying investor presentation are now available on our website at ir.dxpe.com. I will now turn the call over to David to provide his thoughts and a summary of our first quarter performance and financial results.

Good morning. And thank you, Kent. And thanks to everyone for joining us today on our fiscal 2021 first quarter conference call. I will begin today with some perspective on the first quarter and our relative position today and thoughts on the remainder of 2021. Kent, will then take you through the key financial details after my remarks. After his prepared comments, we will open for Q&A. Overall we had a good first quarter, that highlights good execution and a number of positive trends developing across DXP, including the continued execution of our acquisition strategy to accelerate our end-market diversification efforts, continued strength in COVID resistance and end-markets and a strong free cash flow generation. Putting aside challenging week in February with a weather perspective, we were seeing good progress in moving towards our pre-pandemic growth. And we are confident that we are in the early beginnings of returning to our pre-pandemic levels and that remains our focus. Let me thank all of our DXP stakeholders in particular all of our DXPeople for their continued hard work and grit, as we turn the corner from the global pandemic and momentum gradually begins to build in our business. We are encouraged by the improvement in market conditions and remain focused on growing our business in fiscal year 2021. DXP's industrial end-markets which is 67% of our business today, which by the way coming out of the last cycle was 51% appears to have found some legs and shows signs of positive upward movement. The ISM, PMI manufacturing index which gives us an indication of how DXP's broad industrial markets will perform continue to expand from January a 58.7% rating through March a 64% percentage rating. This is above the average for the last 12 months of 56.9% and looks to be…

Thank you, David, and thank you to everyone for joining us for our review of our first quarter 2021 financial results. Q1 financial performance reflects our second quarter of sequential sales increase, as we move past the trough impact of COVID-19 in the third quarter of 2020. Since 2020 was such an unusual year due to the pandemic, we are primarily measuring our performance based on sequential monthly and quarterly growth. Monthly results are likely to experience normal variation and move in either a positive or negative direction based upon unforeseen events like the winter storm that hit in February. However, our overall expectation is that we will see growth versus the previous month throughout the year, which should result in a significant increase in earnings as compared to last year. Overall, DXP's first quarter results were good to see. Service Centers and Supply Chain Services led the way, growing sequentially, which we will review shortly. That said, Q1 reflects the following summary takeaways. Strong first quarter sales and margin performance from recent acquisitions, gross margin improvement sequentially and year-over-year and strong quarterly free cash flow generation. Total sales for the first quarter increased sequentially 5.6% to $245.6 million. We experienced a 15.6% and 0.5% sequential sales growth in Service Centers and Supply Chain Services, respectively. Acquisitions contributed $28.4 million in sales during the quarter. As David mentioned, we are excited to have APO/CEC, Total Equipment and Pumping Solutions as part of the DXP family. Average daily sales for the first quarter were $3.9 million per day versus $3.8 million per day in Q4. Adjusting for acquisitions, average daily sales were $3.4 million per day for the first quarter. That said, the average daily sales trends during the quarter ramped from $3.8 million per day in January to $4.2 million…

[Operator Instructions] Your first question is from Tommy Moll. Your line is open.

Good morning and thanks for taking my questions.

Hey, good morning. Tommy. How are you?

Doing great. Doing great. How are you all?

Good.

Well, you gave some helpful commentary just to unpack the varying trends across the segments for first quarter plus some of the one-time kind of items that you highlighted. So- I think we're good in terms of the first quarter. I'm curious if there's anything you could point to for maybe how April looked or how you think about the progression as we go forward. You called out I think a pretty strong for -- looking back my notes pretty strong exit rate for March. But really at a segment-by-segment level you're seeing some widely varying trends. Is there anything you could do to help us understand how those may move differently would be very helpful. Thank you.

Yes, no worries. Tommy maybe what I'll do is I'll go through the sales per business day. And then maybe David could comment on kind of service centers versus IPS versus supply chain. But just in terms of the cadence just for everyone on the call during the quarter, and we did some normalization this year just because we have a heavy accounting entry we do at the end of the quarter that we felt you should normalize to get a view of the trends. And so sales per business day for January were $3.8 million -- $3.6 million in February, $4.2 million in March, and then early estimates for April show $4.6 million. And so the cadence is good and strong. But to your point there is -- we're seeing a little bit of a difference of this rebound between Service Centers, IPS and Supply Chain. And so I don't -- David if you want to share some thoughts just on kind of...

Sure. Yes Tommy, I think, the Supply Chain Services is -- we've got to point out the fact that they had an adjustment to sales that was pretty significant $900-and-some-odd-thousand. And so if you look at supply chain and add that back. And they actually had sequential growth. And which is encouraging. If you take them through last year they had some oil and gas accounts that were hit pretty hard. And then they also had some airline accounts that actually closed down some facilities et cetera. So that was the two big negatives. The positive were food and beverage and other accounts, but those other was what brought them down. And so we're seeing recovery in a small way in the oil and gas accounts. They're starting to build things again. And so that's good. And then their line accounts that we have are doing fine. And the ones we lost where we lost them last year so we'll build off of that. But sequentially from fourth quarter to first quarter is not reflected very clearly, but it's ever so slightly up. The Service Centers, kind of, the maintenance repair and operating side as people have gone back to work that part has bounced back really nicely and looks to continue. So that's very encouraging for us. And so the real -- the problem there is IPS. And IPS is where we put -- we kind of break out just a refresher. Our branches may sell capital projects, but we take that and put it in IPS. And so we really get a pure picture, which is unusual versus most companies of what our CapEx business looks like versus our maintenance and repair and operating business looks like. So when we look at IPS that's strictly CapEx. And, of course, our oil and gas trends of cut their budgets last year and looks like they're going to kind of go with the same budget this year. I guess the general attitude there is they like the price of oil it's awesome, but they're not -- because they're concerned with what the long-term future looks like et cetera. So they're being reluctant to increase those capital budgets at this point. And I'd say that about the United States because we see a little more positive activity international. The IPS business is not going to go to zero, I want you to note that. But it is less and we can adjust to less and still make some money there, but not like we have in the past.

The only other thing I would add to that Tommy is what we're also seeing in, particularly, in our California West region is there's some projects that are in that IPS segment that are water wastewater that are to come that we're excited about. And so there's -- it's predominantly oil and gas but there are some other end markets in that IPS bucket so…

Okay. Yes. Thank you, both. That's extremely helpful. Let's talk about maybe your own supply chain. There's a lot of commentary around cost inflation and this is probably more on the MRO side of your business. To what extent are you seeing that in your own supplier base? And what are some of the price/cost kind of dynamics that you've managed or plan to manage the rest of this year?

Right. So we don't sell lumber. So that's -- we won't deal with that one -- thank goodness. But we are seeing some price increases. We're seeing more than we've seen in the past and we're seeing numbers that can be pretty high. A high number would be somebody raising prices 10%. And then something more normal would be 4% to 5%. And we're seeing delivery problems and shortages. So all of those things to me is reflecting the fact that I just can't help, but think that inflation is coming. We're also getting pay raise pressures as people come back to work and unemployment goes back down. We'll see. And so -- and then -- but just let me say that some level of inflation 4%, 5% percent wouldn't kill me is good for us in distribution. So as long as you know that we can pass that on to the customer, which we normally can with proper documentation of how the costs have gone up then we can raise prices. I will continue to point out that Supply Chain Services -- our own Supply Chain Services company, it takes a little longer. So they do get some margin pressure, gross profit margin pressure because they have the right to raise those prices, but it takes a while to get that done. So it's a little bit of a lag. Whereas somebody just break something and calls us up and wants something we can give them a new price immediately.

Yes. That’s helpful. Thank you.

But I think we're dealing with all of that fine. We've -- you saw our inventory levels go back up some. We're trying to adjust to what we hope is much better volumes and these shortages. The only one we hadn't been able to fix was the same one that the auto industry has and that's these computer chips from China. We actually use those in our pump side. There are sensors that we use for understanding the operation and temperatures and stuff like that. So those have been impossible to get.

Yes. Let's move down the P&L here to your SG&A. So over the last 12 months, you've definitely taken some out of the model in response to the events we've all lived through. But now as you're at a point where potentially the rest of this year looks pretty good, or at least better than recent quarters, you may be in a position where some of that cost comes back. So what's the philosophy there? I mean, you guys are pretty disciplined on costs generally. So as your revenue potentially heads back higher, is there a rough maybe relationship on how much fixed cost for every unit of sales you add back, or how do you manage that, now that hopefully you're headed the right direction for a while?

So, I'm kind of glad you asked that question. I don't think we manage that process like we normally would, because we felt like that COVID-19 pandemic was an event and it would have a start and a stop. I don't know that necessarily there will really be a stop, but we felt like there was. So we didn't rationalize productivity to the sales volume that we were getting. We kind of -- in my opinion we kind of held on to our talent and our DXPeople. They're not easy to come by or not easy to train up. And so, we didn't really make employee reduction stuff a priority. And so therefore, I think, as you see us expand and grow the top line, you should see leverage on the bottom line. And so, I'd like to think that EBITDA could pretty easily get back to 8%. Our goal is 10% and we've been at 10%, but that's when times are really good. So I'm not targeting 10% anytime really soon, but something more in the line of 8% is appropriate. And so, since we're already doing a pretty good job on gross profit margins, 29-point-something percent is pretty good for us. 30% would be perfect, but I'll take 29-something. SG&A as a percent of sales is really too high for where we're at. But like I said, we took that on, because we wanted to be in a position to recover fast. And so, we hope we got that right.

Yes. Last question from me more from a strategic standpoint. Good to see continued progress on the tuck-in acquisition side. It sounds like at least one more you've got good visibility on. I'm curious in terms of the pipeline, what other context you could give us? How you think the rest of the year may progress? There's a potential tax law change in the works that may have an impact there. But what does the appetite and pipeline look like?

Yes. Yes, Tommy, no, you're spot on just on your earlier comments in the sense that, yes, we've got one where we've got high visibility that hopefully we get done before the end of the quarter, early Q3. And maybe, just in terms of the overall broader market dynamics I think what you see out there is, there's a lot of opportunities in the marketplace that we are chasing and that we're looking at. And then, your last point I think is spot on. I've had those conversations here recently with others, but as this tax law change begins to grab momentum, in a weird way, we saw some of that at the end of 2020 and I think we're going to see a repeat here, because now it's publicly becoming a thought process politically. And so, it always does -- potential tax changes always do create some transaction activity at some level. And we could see that towards the back end of this year, frankly, for those entrepreneurs that feel they need to get in front of it. And so, I think we already got a robust pipeline, but it could accelerate towards the back end of the year. So --

Capital gains going up.

Yes, capital gains going up and then those items. And so --

Tommy, just to be clear though, maybe in my comment that we're looking at certain geographies in certain industries, so we're being pretty selective with the direction that DXP is headed. And we like water and wastewater and we like food and beverage. And so we're -- and we like geographies that are not only gas geographies, that they're industrial geographies or municipality geographies or geographies where we're not in the appropriate business in those areas. But -- so that's kind of what we're thinking. So we're being pretty selective.

From a multiple perspective, Tommy, I think, also maybe what you've been getting at, multiples, there's some pressure on the upside. You've got more private equity guys in the sandbox. And you got sellers' expectations that don't match the profile of their business. And what I mean by that is, a lot of these businesses we look at are closer to lifestyle businesses and they don't necessarily have an aggressive growth plan, yet they want a growth multiple. And so, some of it is also matching up with what David said, the markets and geographies with obviously the right valuation. We try to be disciplined. And so, that way we're creating the value, we'd like to create out there. So...

That’s all very helpful. Thank you, both. Thanks for the time today. I’ll turn it back.

Okay.

And I'm showing no further question at this time. This does conclude our Q&A session. Thank you for participating in today's earnings conference call and have a great day.